Founders' Agreement: Key Clauses Every Startup Needs

Most startup disputes are not about the product; they are about the founders. A founders' agreement sets out, in writing, who owns what, who does what, and what happens if someone leaves. Signing one early is far cheaper than fighting later.

Why you need one

• Avoids misunderstandings about equity and roles
• Protects the company if a co-founder walks away
• Makes sure the company, not an individual, owns the IP
• Investors expect it during due diligence

Key clauses

1. Equity split

State each founder's shareholding and the basis: idea, capital, time, skills. Consider future dilution for an ESOP pool and investors.

2. Vesting and cliff

A common structure is vesting over four years with a one-year cliff. Unvested shares can be bought back at a nominal value if a founder leaves.

3. Roles and responsibilities

Define titles, areas of responsibility, time commitment and decision-making powers.

4. Intellectual property assignment

All code, designs, brand names and content created for the business must belong to the company, including work done before incorporation.

5. Capital contribution and salary

Record what each founder invests and when founders start drawing salaries.

6. Good leaver and bad leaver

Set different buy-back terms depending on whether a founder exits for genuine reasons or for misconduct.

7. Transfer restrictions

Right of first refusal, lock-in periods, tag-along and drag-along rights.

8. Confidentiality and non-solicit

Protects business information and prevents poaching of employees and clients. Post-exit non-competes are hard to enforce in India, so drafting should be careful.

9. Deadlock and dispute resolution

Mechanism to break deadlocks, and arbitration with a chosen seat, such as New Delhi.

Founders' agreement vs shareholders' agreement

Make it enforceable

• Pay proper stamp duty and sign before witnesses.
• Mirror key terms in the AOA.
• Review it when roles or shareholding change.

Our lawyers draft founders' agreements tailored to your startup. See founders' agreement drafting and shareholders' agreements.

Why Choose Vaidam Consultancy?

Our team of chartered accountants, company secretaries and legal professionals handles the paperwork so you can focus on growing your business.

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Frequently Asked Questions

Q1. When should co-founders sign a founders' agreement?

Ideally before or right after incorporating the company, and before any outside investment comes in.

Q2. Is a founders' agreement legally binding?

Yes, it is a contract between the founders. Key terms should also be reflected in the company's Articles of Association so they bind the company.

Q3. What is founder vesting?

Vesting means a founder earns their shares over time, often four years with a one-year cliff, so a founder who leaves early does not keep the full stake.

Q4. Does a founders' agreement need stamp duty?

Yes. Like other agreements, it should be stamped as per the stamp law of the state where it is executed.